After this module, you will be able to explain the welfare enhancing role of property rights in society, and you will be able to describe the different effects that property rights can have on social welfare. If we zoom in into the analysis of property rights, one important insight is that property rights are not a moral category, at least not in the first instance. They are an instrument by human design, to reach specific social goals. As for example, getting prices of consumer goods down by the help of competition, giving entrepreneurs incentives for innovation, or protecting the environment. Property rights allow the owner the full command over a resource, including to deny others the entry or use of it. Only if you have ownership, you are entitled to write a contract, in which you state that someone else may make use of the resource, and the other may have to compensate you in exchange. That makes ownership the fundament for trade and exchange. A patent is a good example for it. Assume you are an inventor. The patent gives you ownership of your invention, and protects you against infringement by imitation. But often inventors are not able to exploit their invention, because other patents are lacking, there's not enough capital, or you have no access to distribution systems. Therefore, inventors are often happy to sign a contract with a patent entrepreneur, who pays you a royalty in exchange for the exclusive right to use your invention. Patent law stipulates that after a couple of years, your patent is no longer protected, and others may use your idea for free. In other words, your intellectual property becomes socialized. Patent law gives you an incentive to work on your invention. Capable entrepreneurs may contract with you in order to exploit the invention exclusively, and finally, all people may use the invention for free. The property right has obviously undergone a cycle from exclusive private property, to public ownership, whereby contracts help to disseminate the implied welfare of the invention across society. This example showcases that ownership is in the first instance, not a moral category, but serves the function of maximizing society's welfare. That means, the deliberate legal design of property rights, aims at making all people in society wealthy. Thereby, it might be useful to grant exclusive ownership in order to incentivize people to become productive for society, and to exchange the property rights by contracts. This way, well, you have a property becomes created, which gets finally into its most valuable societal use. Under certain conditions, public ownership might also be the welfare maximizing solution. You already heard and learned about that in the video about Beaver hunting in Canada, in the 19th century. You also learned in that video, that the optimal allocation of property rights may change over time, from public property to private property. But the other way around can also be true, as in the example of patent law. We will come back to that regarding ownership of data in the following lectures. Now, we will have a closer look on what a property right entails. It's more specific legal design features. You may compare that with the design features of cars for different purposes. The principle design of a car is set. It has a chassis, seats, a steering wheel, a motor, windows, headlights, brakes. But those design features have different relevance for the usefulness of a car, depending on the specific purpose that the car has. An off-road vehicle needs specific tires and a specific gearbox. Also four-wheels drive is necessary. That is different for a formula one car. The delivery van may not need four seats, but a specific platform for loading cargo. The same applies to property rights. Property rights shall incentivize innovation productivity, keeps the transaction costs of trade law, and maximize social welfare. But depending on the specificities of a tangible or intangible good, the property right needs specific design features to perform optimally. Thus, it is the bundle of property rights associated with a product that determines the value of a good. For example, in France, there is the law that paintings of famous French painters must not be sold to other countries. Now, assume you are a French collector considering buying the painting of a famous French painter. You may love the painting, but you would very likely not make a very high bid for it. Why? Because you are not entitled to sell the painting after a couple of years abroad when its price may have increased. The restriction of the property right to sell the painting outside France obviously devalues the painting. Also, you may love the painting as such. Hence, it is a bundle of property rights specifications that gives value to a good. Already in Roman law, the generic specification of property rights were identified. Those specifications may apply all at once, separately, or in combination to a good. Usus, the right to make use of a good, for example, renting a holiday apartment. Usus fructus, the right to receive the benefits and the obligation to balance the losses from using a good, for example, leasing a delivery van and doing business with the delivery. Abusus, the right to make changes to a good, for example, building a house on a rented piece of land. Lus abutendi, the right to sell the good or parts of it, and to keep the profit, for example, selling the copyright of a novel. A good has a higher value the more complete the bundle of associated property rights is. The painting of a famous French painter is more valuable if it can be sold outside France. However, from specification of property rights does not follow automatically that only a full bundle of property rights is maximizing social value. There might be trade offs to be overcome. For example, society may like to protect nature and forbid that on a specific piece of land, coal mining takes place while other activities might be allowed. This example already hints to the category of so-called external effects. An external effect emerges if the use of a good has a negative or a positive effect on others without the possibility to exclude the others from the effect. For example, CO2 emissions are not calculated with its true social costs in production processes. The cost of environmental damage becomes externalized by environmental and health damages which the producer does not compensate. This is a negative externality. Because of the too low calculated costs, it has produced too much of the good. But there are also positive externalities. In those cases, one can enjoy the good without paying for it, because exclusion is not possible. For example, a dike protects all beings behind it, even though they may not have contributed to its building and maintenance. If there is a free lunch, one can expect the problem of overcrowding and exhaustion. No one is going to provide the resource because no one likes to bear the cost for others. As a result, there will be no dikes if building the dikes is purely left to private initiative without further specification of property rights. From the view of property rights theory, it depends on the smart design of the property rights regime to solve environmental problems, to set an incentive for building dikes, to invest in new drugs against viruses, or to maintain copyrights for music composers. Moreover, specific business models valorize on smart regimes of property rights allocations. As for example, Airbnb, Uber, Cloud services, Leasing contracts, or specific financial instruments. In the next video, we will look more closely at digitalization and data ownership. With what kind of goods we are dealing in the case of data? Which data ownership regimes are round and which consequences have those data ownership regimes?
